Options Radar: J C Penney Company Inc, AbbVie Inc, and Dollar General

Reviewing notable options activity on J C Penney Company Inc, AbbVie Inc, and Dollar General Corp.

Nov 21, 2014 at 2:37 PM
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Option traders have taken a shine to department store J C Penney Company Inc (NYSE:JCP), drugmaker AbbVie Inc (NYSE:ABBV), and discount retailer Dollar General Corp. (NYSE:DG). Here's a look at how speculators have been placing their bets on JCP, ABBV, and DG.

  • J C Penney Company Inc (NYSE:JCP) is following the broader equities market higher, up 0.8% at $7.32. However, the stock remains 20% lower year-to-date, and options traders are rolling the dice on a longer-term slump for the shares. Intraday put volume is running at a slightly accelerated clip relative to the norm, and has outpaced call volume by a margin of 2-to-1. Most active by a mile is the deep out-of-the-money January 2017 4-strike put, which has seen more than 6,200 contracts cross the tape. Implied volatility (IV) has popped 2.2 percentage points at the strike, and most of the puts traded on the ask side, underscoring our theory of freshly bought bearish bets. By purchasing the puts to open, the buyers expect JCP to breach $4 -- and sink into record-low territory -- within the next couple of years.

  • AbbVie Inc (NYSE:ABBV) is 2.9% higher at $67.05, and earlier notched a record peak of $67.29, as traders and analysts celebrate a regulatory win. Specifically, the European Medicines Agency (EMA) recommended approval for two of ABBV's hepatitis C drugs. In light of the news and the stock's subsequent rally, Morgan Stanley hiked its price target to $72 from $65, and reiterated an "overweight" rating. In the same optimistic vein, ABBV calls are trading at a 61% mark-up to the average intraday rate, and outnumber puts by a margin of more than 10-to-1. Digging deeper, it looks like short-term bulls are rolling the dice on higher highs for ABBV, buying to open the soon-to-be front-month December 70 calls.

  • Finally, Dollar General Corp. (NYSE:DG) is also flirting with record highs. The security topped out at $67.95 earlier, and was last seen 1.7% higher at $67.65. DG Wednesday said it expects to update Family Dollar Stores, Inc. (NYSE:FDO) shareholders about the duo's M&A status with the Federal Trade Commission (FTC) in the "coming weeks," and specifically, how many stores DG will need to sell to win FTC approval of an FDO buyout. Against this backdrop, DG's 30-day at-the-money IV hit a 52-week peak earlier, reflecting escalating demand -- and, thus, higher prices -- for short-term options. Calls are trading at eight times the typical intraday clip, and one bull constructed a spread to offset the cost of relatively expensive front-month options. The investor bought a block of 6,930 December 70 calls, and simultaneously sold an equal number of December 75 calls, resulting in a net debit of $1.50 per pair of contracts. The strategist's reward will increase from $71.50 (bought strike plus net debit) to $75, at which his profit potential peaks at $3.50 (difference between call strikes, minus net debit), no matter how high DG climbs between now and expiration on Friday, Dec. 19. On the flip side, the trader will forfeit just the net debit if the stock fails to conquer $70.
 

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